2016/09/21

How Venezuela Could Come Back from the Brink

For more than a year now, Venezuelans have borne economic hardships that have spilled out in the form of food riots, long lines at supermarkets and massive street protests. Underlying all those are an overdependence on oil, weak institutions and political uncertainty, leading to calls for a referendum to replace current president Nicolas Maduro.

The oil-producing country has been battered by slumping world oil prices and excess supply since 2015, and the outlook isn’t encouraging on that front. Maduro has refused foreign aid, presumably because it accepting it will weaken his political credibility. Political uncertainty with the country’s national assembly has also hindered a much-needed overhaul of Venezuela’s institutions and police forces.

Much as it looks doomed, Venezuela could have respite and recovery from its woes, say experts. The time is ripe for the country’s opposition parties to force a recall referendum, preferably this year, says Alejandro Velasco, a New York University professor focusing on modern Latin America. In the short term, the country must also accept foreign aid to alleviate the immediate economic crisis and in the longer term, a new government should focus on reducing dependence on oil, says William Burke-White, director of the Perry World House and professor at the University of Pennsylvania Law School.

Venezuela’s economic situation is grim, to say the least. The average Venezuelan spends 35 hours each month waiting to buy food, according to a July Associated Pressreport. A study by Simon Bolivar University found that nine in 10 people say they cannot buy enough food, the story adds. Inflation has reached 700% as the country continues its recession, and basic food and medicine are in severely short supply, according to a September 1Guardianreport. The country’s gross domestic product (GDP) growth rate is the worst worldwide at a negative 8% and inflation is projected to cross 1,600% in 2017 and worsen to nearly 3,500% by 2019,according to the International Monetary Fund.

“If the price of oil continues to be low, the situation might come to breaking point and there might be a popular revolt against the government,” says Wharton management professor Mauro Guillen in an interview with Knowledge@Wharton. “What needs to happen is some kind of an end to the [Hugo] Chavez regime [Maduro is his successor] and for that we need the opposition to continue to play its role.

“If the price of oil continues to be low, the situation might come to breaking point and there might be a popular revolt against the government.”–Mauro Guillen

“What we are seeing is the tail end of the beginning of the end of the Chavez regime,” adds Guillen. “Right now they have the presidency, but in parliament you have the opposition in control. The country is divided into two camps and it is a very dangerous situation and it could degenerate into a lot of violence.”

Velasco cites news reports to say that about 1.5 million people have left Venezuela over the last decade, most of whom were middle-class professionals seeking better lives elsewhere. “The real question is if something resembling a refugee crisis could happen, where working class people who find it difficult to get by flock to places like Colombia,” he says. “Then you have a quantitative shift that you have never seen before in Venezuela.”

Much of Venezuela’s woes are linked to its oil industry, which has accounted for “a massive portion of the Venezuelan economy for 100 years or more,” says Velasco. “That dependency [on oil] has only increased exponentially [in recent years].” Oil accounts for 96% of the country’s exports, according to World Bank data.

“The problem is compounded by the low price of oil,” says Guillen. “If the price of oil were high, it would be a totally different situation. The government could use that money to subsidize prices of essentials and everything would be OK.”

But the country’s woes are not all because of cheap oil. “Venezuela is a country where the oil wealth and the populist government of Chavez has destroyed the institutions and made them puppets,” says Guillen.

Meanwhile, Venezuela’s oil production has continued to decline, partly because prices are down and also because of shortages in the equipment necessary to produce oil, according to Burke-White. “Their economy has collapsed and their oil production capacity with it,” he says. “That can rebuild, but it is only going to rebuild to the degree that there is demand to purchase that, and the price point is high enough to justify the new investment that is going to be needed after years of neglect.”

“People who’ve been historically pro-government … they have just had it, especially with [Nicolas] Maduro.”–Alejandro Velasco

Short-Term Solutions

Velasco says the government could take concrete action in specific ways that it hasn’t done so far. One of those moves is to correct its “tremendously skewed exchange rate” that it has maintained for more than a decade, which Velasco says has only “aggravated the fiscal crisis in Venezuela.” He notes that a wide gap exists between the official exchange rate of the Venezuelan currency and the black market rate, which he says creates more incentives for corruption and causes shortages.

According to Burke-White, the short-term fix is aid. Although Venezuela has said it will not accept aid, he notes that it is currently hosting a six-day summit of the 120-country Non-Aligned Movement (NAM) that began yesterday in the island of Margarita. He suggests Venezuela should pursue “different kinds of partnerships that could be framed not as aid necessarily” and are not from the U.S. or Western Europe. Those partnerships could bring some temporary relief and economic investments, he adds.

Velasco characterized Venezuela hosting the NAM summit as “political showmanship,” where it wants to convey that Venezuela is not isolated as it is being portrayed in the U.S. and on social media. However, he says the government is in such a weakened position that even former supporters have turned against it. “People who’ve been historically pro-government … they have just had it, especially with Maduro.”

Maduro’s refusal to accept aid from foreign countries is understandable in view of his “domestic credibility,” says Velasco. “To suggest that there is a humanitarian crisis would mean complete failure in every capacity he would have as commander of Venezuela’s economy.” Yet on the other hand, Velasco agrees that the crisis is severe, especially as it relates to shortages of medicines and food.

“If we were having this conversation a few years ago, Venezuela would have been thought of as a developed, largely Western economy and a place where people live normal lives,” says Burke-White. The country has not spent the last 20 years in famine and economic hardship, or accepting aid, he notes. “It would be a radical transformation for how Venezuela understands itself. Its urgently necessary but it’s something that the political elite there is not willing to accept precisely [because] it would undermine their credibility fundamentally.”

Longer-Term Solutions

While aid and fixing currency mismatches are quick fixes, the bigger solutions have to come from reducing the economy’s dependence on oil, says Velasco.

The longer term change that Venezuela needs is political change, says Burke-White. The country could reduce its dependence on oil only if growth occurs in other sectors of the economy, he adds. “That is not going to happen until you have a new government. There has got to be a political house cleaning so you can reset the political and economic clock.”

“To suggest that there is a humanitarian crisis would mean complete failure in every capacity [Nicolas Maduro] would have as commander of Venezuela’s economy.”–Alejandro Velasco

Burke-White says tourism used to be a big driver of the Venezuelan economy, but adds that it would take “a long time until people feel safe again in a country with the second or third highest murder rate in the world.”

Guillen agrees that hopes of tourism reducing the dependence on oil are misplaced. “In the short run, that is wishful thinking,” he says. “We know in the long run Venezuela should do that. But nobody is going to travel to Venezuela in the present situation.”

Another unhelpful factor in the current crisis is reduced support from China. Burke-White notes that China has been a big supporter of Venezuela and has lent it some $60 billion over the past decade. However, China has of late begun withdrawing support, arguing that Venezuela has too much outstanding debt and that its loans are not getting paid back. “China as the economic partner or the natural resources procurer is stagnating in Venezuela and that is going to make the economic recovery all the harder,” he adds.

Emerging Political Scenario

The big question is whether the opposition parties could muster sufficient political capital to push for a recall referendum this year or next year, says Velasco. If that referendum is held before January 1, 2017, a new government would be put in place, says Burke-White. However, if that referendum is held next year, Maduro may go, but his party could stay on in power through the natural election cycle, and could remain in power until 2019, he adds. In any event, the opposition is trying to build sufficient political momentum in the next three months to force an election sooner, he notes.

Burke-White puts the chances of the election occurring this year at less than 30% or 40% and feels it is much more likely to happen next year. “This is a government that for two big political cycles – [Hugo] Chavez and now Maduro — – has managed to stay in power,” he says. Chavez ruled from 1999 until his death in March 2013, and was succeeded by Maduro. “They seem to be not solving the crisis, but riding it through the next several months.”

“There has got to be a political house cleaning so you can reset the political and economic clock there.”–William Burke-White

Guillen, too, says that a regime change in Venezuela will have to wait until the elections next year, because he doesn’t think the opposition is sufficiently prepared now. “The government still has a lot of resources under its control,” he says. “However, if the price of oil continues to be weak the government will not be able to buy votes.”

Velasco feels Maduro may be forced to resign – “like a scapegoat” — and a referendum could occur sooner than Burke-White predicts. He notes that the Venezuelan opposition is in “a difficult position” because although it has political momentum, it would be hard put to find solutions to emerge from the current crisis. “There is more willingness for a negotiated solution that could take the shape of a Maduro resignation or a referendum in 2017 that brings closer negotiations between the government and the opposition,” he says.

Further, Velasco notes that the left-wing Chavismo movement that led Chavez to power is now a fragmented force although it seems united. He says it was far more united under Chavez than it is under Maduro because of the former’s commanding personality. Maduro doesn’t have the command that would bring together the various factions, he adds. In fact, factions within Chavismo would see themselves benefitting if Maduro is out of power, either because they would gain more power or because they could negotiate better with the opposition, he says. “The opposition has a real opportunity at this point,” he adds. “It’s far stronger and far more united than it has ever been.”

Neighbors and Foes

Maduro, like Chavez, sees the U.S. as a foe, and he has blamed the country for instigating riots in his country and for fueling the slump in global oil prices. Against that backdrop, Velasco says the U.S. should “do nothing” in the current crisis, because “anything that it does plays domestically to a narrative of intervention … even though that has been losing appeal over the last couple of years as the crisis deepened.” The U.S. could take other actions, such as putting pressure on Venezuelan government officials through lawsuits as has been done on issues such as bribery and human rights abuses. It could also help by increasing the quota of visas it grants to Venezuelans seeking asylum or residency in the U.S., which it hasn’t done so far, he adds.

“Whoever comes to power next is going to be blamed for the same problems that the current government is being blamed for. You really wouldn’t want to come into power in Venezuela right now.”–William Burke-White

Venezuela shares its borders with Colombia and Brazil, two countries with whom relationships have been unsteady of late. Colombia has long been Venezuela’s largest trading partner but its border with Venezuela had been closed for about a year on concerns over smuggling, although it has since been reopened, says Velasco. Brazil’s current government led by Michel Temer is also bringing diplomatic pressure on Venezuela. After the recent impeachment of Brazil’s former president Dilma Rousseff, Venezuela, Ecuador and Bolivia recalled their ambassadors from Brazil. In response, Brazil withdrew its envoys from those countries. Similar diplomatic pressures are coming from Argentina as well, says Velasco.

Burke-White says Venezuela has much work to do with rebuilding public institutions, alleviating food scarcity, rebuilding the oil industry and reforming the police system, which are hard to do and expensive. “Whoever comes to power next is going to be blamed for the same problems that the current government is being blamed for,” he says. “You really wouldn’t want to come into power in Venezuela right now.”